Economists Forecast Inflation Fell Below Two Percent in September

Economists are predicting that inflation will continue to decrease this month, allowing the Bank of Canada to proceed with cutting its benchmark interest rate.

“We anticipate that headline inflation will drop below the bank’s two-per-cent target in September,” stated BMO economist Shelly Kaushik.

Kaushik mentioned that she foresees annual headline inflation cooling to 1.8 per cent, largely due to lower gas prices in the previous month. However, she noted that as pump prices rose in October, the headline number might increase in the next report.

The upcoming report on consumer price growth is scheduled for release on Tuesday and is the last major economic report before the Bank of Canada’s upcoming interest rate decision on Oct. 23.

TD Bank senior economist James Orlando expects headline inflation to slow to 1.9 per cent in September, with core inflation measures remaining above two per cent.

“Now that we’ve hit target, the focus is on how to maintain it,” he explained.

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In August, inflation reached the Bank of Canada’s two-per-cent target, dropping from 2.5 per cent year-over-year in July to its lowest level since February 2021. This decline was supported by lower gasoline prices.

Nathan Janzen, assistant chief economist at RBC, commented that underlying inflation pressures are decreasing, with shelter costs, especially mortgage payments, exerting upward pressure on the overall figure.

Janzen mentioned that this upward pressure is gradually easing as interest rate cuts start to impact the economy, although mortgage interest rates will continue to contribute to inflation for some time.

“It takes time for market rate adjustments to affect five-year fixed-rate mortgage payments through renewals, leading to further increases in mortgage costs. However, these increases are becoming smaller,” Janzen explained, also predicting headline inflation of 1.8 per cent in September.

The Bank of Canada initiated interest rate hikes in March 2022 to combat inflation, pausing in mid-2023 at five per cent before starting the current round of cuts in June.

Having already cut rates three times this year, the Bank is anticipated to continue cutting as other aspects of the economy, such as the labor market, have weakened.

Despite surprisingly strong labor market performance in September, with more than double the number of jobs added compared to August and a decrease in the unemployment rate to 6.5 per cent, the overall trend shows a gradual weakening of the job market. This strengthens the argument for rate cuts in both October and December, according to many economists.

The question remains about the size of these cuts.

Orlando anticipates quarter-point cuts by the Bank of Canada this month and in December, explaining, “Current data does not indicate a need to accelerate rate cuts.”

Orlando further stated that the Bank is currently more concerned with the labor market than with inflation. He highlighted that Friday’s jobs report was not as dire as anticipated, aligning with the overall economic trend that does not necessitate a faster rate of cuts.

Some experts believe that the Bank could opt for a more aggressive approach. Janzen, for instance, foresees two larger-sized cuts of half a percentage point each in October and December, even after Friday’s jobs report.

“There is mounting evidence that interest rates are higher than necessary, potentially significantly so,” he remarked.

Kaushik, while predicting two smaller cuts this year, also sees the possibility of a half-percentage-point cut. “The decision between 25 and 50 basis points is still undecided,” she added.

Bank of Canada governor Tiff Macklem suggested in September that if economic weakness persists, the central bank may consider more substantial cuts.

“With inflation nearing the target, we must guard against the risk of the economy being too weak and inflation dropping too much,” Macklem stated following a rate cut on Sept. 4.

Additionally, the Bank’s latest surveys on consumer and business outlooks released on Friday indicated that both sectors remained subdued, with consumers showing less pessimism about their finances but still reducing their spending.